Proterra Inc. (NASDAQ:PTRA) Q4 2022 Earnings Call Transcript

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Proterra Inc. (NASDAQ:PTRA) Q4 2022 Earnings Call Transcript March 17, 2023

Operator: Good afternoon, and welcome to Proterra's Fourth Quarter 2022 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to Aaron Chew, Vice President of Investor Relations. Thank you. Please go ahead.

Aaron Chew: Thank you, operator, and thank you all for joining us for Proterra's Fourth Quarter 2022 Conference Call. Joining us today from Proterra are our CEO, Gareth Joyce; and our CFO, Karina Padilla. After the market closed, we issued our quarterly letter and our 10-K will be filed tomorrow. During this conference call, we will make statements related to our business and industry that are forward-looking statements, including statements that express beliefs, expectation, projection, forecast, anticipation, plans, guidance and similar phrases or intent regarding future events in the company's future performance, which are considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These statements are not guarantees of future performance.

They are subject to a variety of risks and uncertainties, including those noted in our quarterly letter and our filings with the SEC. Our actual results could differ materially from expectations reflected in any forward-looking statements. We specifically disclaim any intent or obligation to update these forward-looking statements, except as required by law. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on March 15, 2023. Since then, we may have made announcements related to the topics discussed, so please refer to the company's most recent press releases and SEC filings. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and via the Investor Relations section of our website.

Additionally, non-GAAP financial measures will be discussed on today's conference call, in addition to financial information prepared in accordance with U.S. GAAP. These non-GAAP financial measures should be considered in addition to, but not as a substitute for the information prepared in accordance with GAAP. A description of these non-GAAP financial measures and a reconciliation of these measures to their most directly comparable GAAP financial measures can be found in today's quarterly letter available on our website at Now we will kick off the call today by introducing our Chief Executive Officer, Gareth Joyce, for his opening remarks. Gareth?

Gareth Joyce: Thank you, Aaron, and to everyone for joining us on the call today. 2022 was a momentous year for Proterra, both in terms of the progress our business has made but also in terms of the challenges we had to overcome. And in 2023, we opened a new chapter in Proterra's journey in which we expect to generate more revenue from battery sales than bus sales. And we aim to improve manufacturing efficiency, gross margins and cash consumption through both the ramping of production at our new multi-gigawatt hour capable Powered 1 facility, the consolidation of bus manufacturing in Greenville and a reduction in operating expenses. For the call today, I will open with a summary of 2022, most of the discussion of our 2022 audit and a review of our 2022 operating results.

Then I will pass it to our CFO, Karina Padilla to provide the quarterly detail. And finally, I will close with our 2023 outlook. First, I'd like to address our 10-K in deep. When we file our 2022 10-K, it will include management's and our auditor's conclusion that there is substantial doubt about our ability to continue as a going concern. This going concern qualification that will be included in our auditor's report in the 10-K would constitute an event of default under both our convertible notes and our credit facility. However, we have obtained a waiver under the convertible notes until March 31, 2023. We have a lot to do with our debt covenants. We have approximately $170 million of convertible notes outstanding, for which there is a minimum liquidity covenant that requires our cash and liquidity to exceed 4x the cash consumption at the end of each quarter.

At the end of Q4 2022, we did not meet this covenant. The convertible debt holders provided a way by retroactively for the end of 2022 for this covenant in addition to a waiver for a quarterly reporting covenant for prior periods. They also provided a prospective waiver in respect to our auditor's report containing a going concern qualification in our 2022 10-K. If we do not obtain a further waiver beyond March 31, 2023, all amounts outstanding under the convertible notes could become immediately due and payable and all commitment obligations under our credit facility could be terminated. But we are working with our debt holders and are optimistic about finding a resolution. We have also implemented a number of cost reduction initiatives since the start of 2023, and we expect to lower our cash consumption starting in Q2.

At the end of 2022, our cash, cash equivalents and investments were $298 million. Our 2022 10-K will also include management and auditor reports disclosing material weaknesses in our internal controls. To be clear, there is no restatement of prior financial statements. In 2022, Proterra became a large accelerated filer within 6 months of the closing of our leaseback transaction and thus became required to provide independent auditor's anticipation of our internal controls over financial reporting. We are hard at work implementing a remediation plan. Now having addressed these two important financial matters, I will turn to our operating results. While Karina will dive into the Q4 quarterly detail, I'll provide a summary of what was a very busy and productive year.

All in, we accomplished a great deal in 2022 and so far in 2023. We have completed construction of what we call Powered 1, our new battery factory design to manufacture multiple gigawatt hours of batteries per year once fully ramped. We produced the first complete modules and pack assemblies at the facility at the start of the year. And while the first stages of the ramp have been slow in January and February, we have made significant progress over the last few weeks. We've also produced a little more than 100 battery packs at Powered 1 since the start of production and more than half of them produced in the last 4 weeks. Last year, we also announced multiple new battery supply agreements with OEMs including the ship groups and the rail groups EMC, amongst others, growing the Proterra Powered & Energy goal to approximately $1 million and total company backlog to approximately $1.6 billion, including transit.

And we achieved our revenue guidance for 2022 despite continued parts shortages. Total revenue for the full year 2022 grew 27% year-over-year to $309 million, in line with the revenue guidance range of $300 million to $325 million that we offered in March of last year despite challenges in the year. At Proterra Powered & Energy, revenue for the full year 2022 grew 150% year-over-year to a record $118 million. Proterra Powered delivered 1,229 vehicle battery systems for full year 2022, up 350% compared to 2021. In 2022, we delivered battery systems to 17 OEMs, including prototypes for vehicles ranging from electric school buses to coach buses, stepvans and cargo vans to Class 7 and 8 delivery trucks, excavators, forklifts and mining equipment.

Through year-end 2022, Proterra Powered has delivered battery systems to our OEM customers for more than 1,600 vehicles since our first delivery in 2018, excluding the batteries produced for more than 1,000 Proterra transit buses. Battery production, including Proterra Transit was 342-megawatt hours for the full year 2022, which is up 81% from 189-megawatt hours in 2021. Through year-end 2022, we have cumulatively produced more than 800-megawatt hours of heavy-duty batteries for commercial and industrial vehicles. And at Proterra Energy, deliveries grew 143% year-over-year to 35 megawatts in 2022. As mentioned, Proterra Powered & Energy ended 2022 with a backlog of approximately $1 billion. This only includes minimum order quantities in our backlog, not the deliveries targeted in our supply agreements.

Some of our supply agreements do not include any minimum order quantities, but we expect our existing supply agreements to generate additional revenue. Lastly, on Proterra Transit, we delivered 199 new electric transit buses in 2022, down slightly from 208 in 2021, as well as 14 pre-owned buses over the course of the year, up from 9 in 2021. The decline in new bus deliveries was largely attributable to shortages in wiring harnesses, which was most acute in Q4 and prevented us from adding a second shift. As these constraints and our bus production growth not only translated into lower revenue growth but also significantly lower gross margins, which were under pressure from inflation, low fixed cost absorption due to the inefficient material flow to the production lines as well as supplier penalties incurred in Q4 on volume commitments.

Proterra Transit backlog remains strong at $550 million at the end of 2022, which is up more than $100 million from year-end 2021. Now I will pass it over to our CFO, Karina Padilla, who will discuss more specifically our Q4 results. Karina?

Karina Padilla: Thanks, Gareth. I'll provide a summary of our Q4 revenue, gross margin, adjusted EBITDA and cash flow. First, starting with our Q4 results. Consolidated revenue was $80 million in the fourth quarter of 2022, representing growth of 17% year-over-year, albeit a decline of 17% compared to Q3 2022 due largely to supply chain constraints, limiting Proterra Transit production and difficult comparisons with a record quarter of deliveries at Proterra Energy. Taking into the results, Proterra Powered & Energy revenue in Q4 grew more than 141% year-over-year to $32 million. So we declined compared to Q3 largely to a sequential decline in timing of Proterra Energy delivery. Proterra Powered & Energy represented more than 40% of the total revenue in Q4, more than doubling its 19% contribution in Q4 of the prior year.

Proterra Powered deliveries in Q4 grew 117% year-over-year to 302 battery systems. Proterra Energy delivered 6.5 megawatts of heavy-duty fleet-specific DC fast chargers in Q4, up 242% year-over-year, albeit declining from the record 22.5 megawatts delivered in Q3 when we completed delivery of our largest charging project to date, 9 megawatts in Miami, Florida. Deliveries spanned 14 different customers in Q4 and included 1 of our megawatt scale fleet chargers. 50% of delivery were approximately 3.4 megawatts were delivered to non-transit bus customers in Q4. At Proterra transit, revenue in the quarter was $49 million. This represented 12% year-over-year and 14% sequential decline as our production output continued to be hampered bus wiring harness shortages.

bus, transport, vehicle
bus, transport, vehicle

Photo by Teddy O on Unsplash

The wiring harness shortage resulted in us delivering 47 new electric buses in the quarter, down 13% year-over-year and 22% sequentially as well as for pre-owned buses, down from 9 in Q4 of 2021. I'm pleased to share that the efforts regarding our harness constraints are coming to fruition. And at the end of the first quarter, we are no longer relying on a single source supplier. We expect the improvement of supplies to continue and to improve as the year progresses as we continue to ramp our new supply sources. Moving on to gross margins. We are disappointed with our gross margin performance. With that said, there's a lot in there that's worth unpacking in the quarter. The reported gross loss in Q4 of 2022 was $20 million compared to a gross loss of $2.8 million in Q4 2021.

A large portion of the gross loss was driven by a few period charges booked in the quarter as well as start-up cost for Powered 1. We booked approximately $70 million of costs in Q4 and related to a variety of circumstances accounting for approximately 20 percentage points of gross margin. Almost $8 million was due to a penalty related to minimum commitments to purchase bus bodies. The penalty reflects volume adjustments for 2022 and 2023. These were based on volume commitments with legacy obligations and limited flexibility based on when the contract was negotiated. Production was impacted largely as a result of harness constraints in 2022 and an adjustment for the projected volume impact as we increase our harness supply and a transition period from our footprint consolidation efforts announced in January.

We will transition all of manufacturing from City of Industry to our facility in Greenville, South Carolina. As you know, prior to COVID, we were projected to be operating across multiple facilities and multiple ships prior to the supply chain constraints currently impacting the entire industry. Our backlog continues to grow and industry funding is at historic levels. We believe we have the ability to increase capacity and output while reducing costs through footprint consolidation. We plan to add ships and reduce fixed and variable costs such as logistics. Costs were also impacted by $5 million related to inventory and year-end accounting true-ups. Lastly, we incurred $3 million in Q4 related to start-up costs for Powered 1. In aggregate, $13 million of the $17 million were related to fourth quarter period charges.

While start-up cost and true-up charges were certainly the biggest contributor in Q4 gross loss. We were also adversely impacted by operating challenges as well. On one hand, were continued deliveries of lower-priced contracts that were added to backlog well before the recent jump in inflation. These low and sometimes negative margin deals are expected to improve throughout the year and be flushed out by the second half of 2023 as we have cycled through a large portion of our transit contracts with lower fleet inflation pricing. We also had inflation headwinds and manufacturing inefficiencies due to low but capacity utilization, high turnover and increase in overhead costs. Fortunately, we believe price increases we began implementing in 2022 and the forthcoming consolidation of manufacturing facilities have laid the ground work to drive higher gross margins by the end of 2023.

Gareth will discuss this dynamic in greater detail shortly. Moving on to operating expenses. Operating expenses in the fourth quarter were $53 million, representing an increase of 40% year-over-year, including $3 million related to start-up costs for Powered 1 factory that was under construction. Compared to Q3 2022, operating expenses declined 6% as we slowed hiring and reduced non-personnel costs. Importantly, we are implementing a cost reduction initiative announced in Q1 2023 that includes a workforce restructuring plan that we expect to reduce 2023 operating expenses by approximately $15 million. Our adjusted EBITDA loss in Q4 was $60 million, driven largely by a gross loss of $20 million and operating expenses of approximately $55 million, offset by non-cash compensation of $6 million and excluding Powered 1 start-up cost of $5 million.

Moving on to cash. We ended the quarter with $298 million in cash equivalents and short-term investments. Total cash usage in Q4 was approximately $110 million, a slight improvement from Q3 2022, on top of our adjusted EBITDA loss of $60 million. Cash usage was impacted by an increase in accounts receivable of almost $30 million, the bulk of which we have collected in Q1 of 2023, a $5 million increase in inventory largely related to battery cell purchases and $18 million in CapEx, most of which was related to Powered 1. All in, cash consumed in 2022 was $363 million. However, we expect an improvement in cash consumption in 2023 from the following: we have a workforce restructuring plan in place; consolidation of the bus production facility in Greenville; material reduction in capital expenditures with the completion of Powered 1; and efficiency and working capital usage.

It's important to note that beyond our cash and cash equivalents of almost $300 million. We have more than $100 million utilized in working capital at the end of 2022. The cost reduction, combined with working capital efficiencies, we expect to reduce our cash consumption in 2023 by up to 30%, driven by lower construction costs and restructuring savings. Finally, I would like to provide some commentary around our material weaknesses in internal control. Sales compliance is a journey. We are in year one of our journey, and we have been working on implementing our internal controls processes. 2022 was the first year we were required to make a formal assessment in our internal control environment and concluded we had material weaknesses. The material weaknesses will be summarized in detail in our 10-K.

I will close by letting you know that management is committed to execute the remediation plan of our material weaknesses and make this the utmost priority. And with that, I'll pass it back to Gareth.

Gareth Joyce: Thanks, Karina. All in, we faced a number of challenging headwinds in 2022. We experienced a surge in inflation to levels not seen in decades. We faced sustained supply chain constraints, particularly from shorter goods in critical bus parts. And consequently margins were pressured by low fixed cost absorption due to underutilized bus manufacturing capacity and raw material cost pressures as well as supplier penalties incurred in Q4 2022 on volume commitments. And we also increased the start-up expenses for our new Powered 1 facility. On the other hand, whilst acknowledging the headwinds, it's important to also reflect on what we achieved in 2022, underscoring the strength of the business that we have built to date.

We achieved our revenue guidance for the year despite extended parts shortages. Proterra Powered & Energy is not only driving this growth, but it has become a material portion of our revenue as well. We completed construction of our first high-volume purpose-built battery factory capable of annual production of multiple gigawatt hours once ramped. We announced the consolidation of our bus manufacturings at our flagship Greenville site at the end of Q1 2023 that should reduce manufacturing overhead costs and improve bus manufacturing efficiency and margins. As one data point, the average labor hours required per bus produced in City of Industry in 2022 was more than 250 hours higher than in Greenville. Simultaneously, we announced the consolidation of battery manufacturing by the end of Q3.

As with bus production, we expect efficiencies in non-cell production costs to result from this. We concluded approximately half of our workforce restructuring plan during Q1 2023, which we expect to reduce 2023 operating expenses by approximately $15 million. And we closed our 2022 with a $1.6 billion backlog with Powered & Energy accounting for approximately $1 billion of that. Looking ahead to 2023, I feel confident about the foundation we have both to support the future growth of Proterra. Our focus will be on improving our operational and manufacturing efficiency and ultimately, our margins operating expenses and cash consumption. With the closure of City of Industry, we can increasingly focus our management attention on the core of our operations in South Carolina, with reduced complexity in our logistics and manufacturing footprint.

However, we will survey facility and other overhead costs for the City of Industry operation for most of the year and that's mostly carried by Powered & Energy as well as severance and restructuring costs. But we expect this closure to have a benefit to margins by next year. With all this in mind, we're establishing our 2023 guidance today with revenue expected in the range of $450 million to $500 million. Proterra Transit is expected to show modest year-on-year revenue improvement with Proterra Powered & Energy driving most of the growth. As much of this is driven by the ramp of Powered 1, we're starting slowly in the first few months of the year. Annual revenue growth is expected to be concentrated in the second half of the year with little benefit in Q1 2023.

On gross margins, we are not providing quantitative guidance but because of high underutilization of Powered 1 expected in the first half of 2023 and continued City of Industry facility costs until the end of Q3, we expect gross margins to remain negative through the first half of the year before turning positive in the second half of the year. And though we do not expect to realize majority of the cost benefits from the ramp of Powered 1 and the closure of City of Industry in 2023, this creates the possibility to achieve new hires in gross margins in 2024. On operating expenses, our workforce restructuring was announced in January 2023 with no expected benefit from Q1. But overall, we expect operating expenses to decline from more than 60% of revenue in 2022 to approximately 40% of revenue in 2023.

We expect capital expenditures of approximately $25 million for the full year 2023, and finally, we anticipate seeking to raise additional capital to strengthen the balance sheet in support of the growth opportunities that lie ahead of us. In closing, as the commercial vehicle market converts to zero emission powertrains, we believe the combination of our Proterra Powered battery technology, our Proterra Energy charging solutions, our balance Software-as-a-Service products and our Proterra Transit buses established Proterra as a unique brand that is well positioned to provide commercial vehicle manufacturers and fleet operators with solutions to their future needs. We look forward to leveraging this position to continue to drive revenue and margins higher.

Finally, I would like to thank our team at Proterra for your determination and commitment to our mission no matter what the challenge. With that, I'll open it up to Q&A.

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